Economic outlook

Economic recovery remains a distant hope for many but can we afford to remain on state-funded life support, asks RICS Chief Economist Simon Rubinsohn

For a good many property professionals, particularly those working in the hard pressed construction sector, all the talk of economic recovery may appear to be little more than hot air.

Even those working in areas of the built environment who are beginning to see some of the payback from the extraordinarily low level of interest rates and the panoply of government initiatives are benefiting more in price terms rather than volumes which would be altogether more rewarding.

Fundamentally, some of the key obstacles to more broad based and sustainable recovery in this highly cyclical part of the economy remain.

Most importantly, mortgage and development finance remain heavily constrained and, despite some evidence that credit conditions may be easing in a modest way, a return to the era of ‘cheap and easy money’ is certainly not on the horizon. In truth, no one would really want to rush back to that environment given what we have seen as its legacy.

However, the understandable need of the authorities to gradually unwind some of the measures designed to support the economy in its hour of greatest need could just make the lending environment a little more challenging as this year wears on.

One example of this is the probable ending of the Bank of England Special Liquidity Scheme in 2011.

This initiative allowed banks to temporarily swap difficult to trade assets such as mortgage backed securities for Treasury Bills, lessening uncertainty surrounding the quality of their balance sheets and, in the process, raising their capacity to lend. Industry commentators are already fretting that a significant ‘funding gap’ will open up if the strategy is pursued.

More immediately, the bank has also taken the decision to suspend the quantitative easing programme which now stands at a hefty £200bn.

With one big buyer of gilts removed from the equation, bond yields could drift upwards with direct ramifications for swap rates and, ultimately, the cost of fixed rate money for both households and industry.

The simple fact is that at some point the patient does need to come off life support. Getting the timing right is a huge challenge but being too tardy in taking the appropriate steps runs just as many risks as acting too quickly.

It may seem a little premature to talk of a return of asset price bubbles with the UK economy limping out of recession but it is worth noting that estate agents in some parts of London responding to the RICS Housing Market Survey are already reporting residential prices back at 2007 peak level.

Further information
www.rics.org/economics